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					Department of Health and Human Services

        OFFICE OF
   INSPECTOR GENERAL




 SUPPLIERS’ ACQUISITION COSTS
    FOR ALBUTEROL SULFATE
                        OFFICE OF INSPECTOR GENERAL

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as
amended, is to protect the integrity of the Department of Health and Human Services’ (HHS)
programs as well as the health and welfare of beneficiaries served by those programs. This
statutory mission is carried out through a nationwide network of audits, investigations, and
inspections conducted by three OIG operating components: the Office of Audit Services, the
Office of Investigations, and the Office of Evaluation and Inspections. The OIG also informs
the Secretary of HHS of program and management problems and recommends courses to
correct them.

                            OFFICE OF AUDIT SERVICES

The OIG’S Office of Audit Services (OAS) provides all auditing services for HHS, either by
conducting audits with its own audit resources or by overseeing audit work done by others.
Audits examine the performance of HHS programs and/or its grantees and contractors in
carrying out their respective responsibilities and are intended to provide independent
assessments of HHS programs and operations in order to reduce waste, abuse, and
mismanagement and to promote economy and efficiency throughout the Department.

                            OFFICE OF INVESTIGATIONS

The OIG’S Office of Investigations (01) conducts criminal, civil, and administrative
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of
unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions,
administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud
control units which investigate and prosecute fraud and patient abuse in the Medicaid program.

               OFFICE OF EVALUATION AND INSPECTIONS

The OIGS Office of Evaluation and Inspections (OEI) conducts short-term management and
program evaluations (called inspections) that focus on issues of concern to the Department,
the Congress, and the public. The findings and recommendations contained in these inspection
reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability,
and effectiveness of departmental programs. This report was prepared in the Philadelphia
Regional Office under the direction of Robert A. Vito, Regional Inspector General.

PHILADELPHIA REGIONAL STAFF                               HEADQUARTERS STAFF

Robert A. Katz, Project Leader                            Mary Beth Clarke, ProgramSpecialist

Amy J. Sernyak, ProgramAnalyst

Karen Folk, Intern




To obtain copies of this report, please call the Philadelphia Regional Office at (800) 531-9562
Department of Health and Human Services

        OFFICE OF
   INSPECTOR GENERAL




 SUPPLIERS’ ACQUISITION COSTS
    FOR ALBUTEROL SULFATE
                EXECUTIVE                               SUMMARY

PURPOSE

This report   examines   suppliers’   acquisition   costs and Medicare       for
                                                                         allowances
albuterol sulfate, an inhalation prescription drug used in conjunction with nebulizers.

BACKGROUND

Title XVIII of the Social Security Act prescribes coverage requirements under Part B
of the Medicare program. Part B covered items and services include durable medical
equipment (DME) as well as certain outpatient prescription drugs. The Health Care
Financing Administration (HCFA) administers the Medicare program.

Medicare does not generally pay for outpatient prescription drugs. However, there
are several exceptions to this general rule, including payment for drugs used in
conjunction with durable medical equipment (DME), such as a nebulizer.       For such
drugs, Medicare computes an allowed amount based on the lower of estimated
acquisition costs (EACS) or the median of national average wholesale prices (AWPS).

Medicare allowed amounts for all inhalation drugs remained relatively stable during
1990 through 1992, never exceeding about $78 million annually. In 1993, allowances
rose to about $170 million, and climbed to about $227 million in 1994, an increase of
almost 200 percent since 1990. During the 14-month period of our review--January 1,
1994 through February 28, 1995--allowances for inhalation drugs totaled approximately
$269 million. The subject of this study--albuterol sulfate--accounted for more than
$182 million in allowances during the 14-month period.

In this report, we examine Medicare payments for albuterol sulfate compared to
suppliers’ acquisition costs for the drug. Albuterol sulfate is the most commonly
prescribed inhalation drug used for nebulizer therapy. This report is one of a series of
Office of Inspector General (OIG) inspections concerning Medicare payments for
outpatient prescription drugs in general and inhalation drugs in particular.

FINDINGS

Medicarek allowances for albuterol sulfate substantidj         exceed supplitm’ acquisition costs
for the drug.

       Suppliers pay an average cost of $0.19 per milliliter (ml) to purchase albuterol
       sulfate, while Medicare’s allowed amounts ranged from $0.40 per ml to $0.43
       per ml during the period of our review. Medicare could have saved $94 million
       during the 14-month period of our review if albuterol sulfate allowances had
       been based on the average of supplier invoice costs.



                                                    i
      Average supplier costs for albuterol sulfate ranged from $0.14 per ml to $0.23
      per ml depending on the purchase source. Suppliers purchasing albuterol
      sulfate directly from a manufacturer paid the lowest average cost, $0.14 per ml.
      When purchased from wholesalers, suppliers paid an average of $0.20 per ml.
      Suppliers purchasing the drug from pharmacies paid the highest average cost,
      $0.23 per ml. Most of the albuterol sulfate billed to the Medicare program was
      the generic form of the drug.

RECOMMENDATIONS

The findings of this report indicate that Medicare’s allowances for albuterol sulfate
substantially exceed suppliers’ costs for the drug. During the period of our review,
Medicare reimbursed suppliers at allowed amounts ranging from $0.40 to $0.43 per ml
of albuterol sulfate. These allowances were based on drug manufacturers’ AWPS.
Current HCFA regulations allow Medicare reimbursement to be based on the lower of
EAC or median AWP. However, HCFA has been unsuccessful in obtaining the data
to determine EAC.

We believe our invoice cost analysis further supports the recommendation  made in an
earlier OIG report entitled Medicare Payments for Nebulizer Drugs (OEI-03-94-O0390).
In that report, we suggested various options and recommended that HCFA should
reexamine its Medicare drug reimbursement methodologies with the goal of reducing
payments for prescription drugs. Options included a discounted wholesale price,
manufacturers’ rebates, competitive bidding, inherent reasonableness, and acquisition
cost. For our readers’ convenience, we have included the full text of these options in
the Recommendation section of this report.

HCFA COMMENTS

The HCFA concurred with our recommendation.       In exploring new strategies for
changing Medicare’s payment for prescription drugs, HCFA has constructed a
framework to calculate drug prices centrally. They are also reviewing other
approaches that could improve Medicare drug reimbursement.      For the complete text
of HCFA’S comments, see Appendix D.

OIG RESPONSE

We support HCFA’S efforts to revise its drug reimbursement mechanisms to more
appropriately pay for prescription drugs covered under the Medicare program. We
believe revisions to the current payment methodologies that take into account the
actual costs of these drugs would provide significant savings to the Medicare program.




                                           11
                        TABLE                     OF CONTENTS



EXECUTIVE          SUMMARY


INTRODUCTION              . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1


FINDINGS         . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...6


    . Medicare’s allowances exceed suppliers’ acquisition costs                            . . . . . . . . . . . . . . . . . 6


RECOMMENDATIONS                      . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9


APPENDICES           . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


kNonrespondent            Analysis..         . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..A-l


B: Cost Estimates and Confidence Intervals . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1


C     Calculation of Potential Medicare Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1


D: Agency Comments               . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..D-l

                         INTRODUCTION


PURPOSE

This report examines suppliers’ acquisition costs and Medicare allowances for
albuterol sulfate, an inhalation prescription drug used in conjunction with nebulizers.

BACKGROUND

Title XVIII of the Social Security Act prescribes coverage requirements under Part B
of the Medicare program. Part B covered items and services include durable medical
equipment (DME) as well as certain outpatient prescription drugs. The Health Care
Financing Administration (HCFA) administers the Medicare program.

Medicare Coverage of Presaiplion Drugs

Medicare does not generally pay for outpatient prescription drugs. However, there
are several exceptions to this general rule. These exceptions are detailed in section
2100.5 of the Medicare Carriers Manual which specifies instances involving covered
uses of outpatient prescription drugs, including drugs used in conjunction with DME.
The Manual states that drugs are covered under Part B as long as the drugs are
necessary for the effective use of the DME.

A nebulizer is a type of DME through which prescription      drugs are administered for
inhalation therapy. It consists essentially of two components: (1) a power source such
as an air compressor or ultrasonic device, and (2) a dispensing mechanism consisting
of flexible tubing, a mouthpiece, and liquid reservoir. The nebulizer is used by placing
an inhalation prescription drug into its reservoir which is then converted into a fine
spray by the power source and inhaled by the user.

In accordance with HCFA policy, if a beneficiary has a severe respiratory illness or
disease, Medicare will pay for certain inhalation drugs that transform a nebulizer into
effective therapy for that condition. Medicare guidelines stipulate that the prescribed
drug must be used to deliver respiratory therapy, and the nebulizer must be the means
to deliver that therapy. If these conditions are met, Medicare will reimburse both the
inhalation drug and the nebulizer for as long as the drug is necessary for the effective
use of the nebulizer.

According to HCFA Part B data, Medicare allowed amounts for all inhalation drugs
remained relatively stable during the years 1990 through 1992, never exceeding about




                                             1

$78 million annually .1 In 1993, allowances increased to about $170 million and rose
to about $227 million in 1994, an increase of almost 200 percent from 1990. During
the 14-month period of our review--January 1, 1994 through February 28, 1995--
allowed amounts for inhalation drugs totaled about $269 million.

Albuterol Sulfate Allowances

Albuterol sulfate 0.083%, hereafter referred to as    albuterol sulfate, is the most

commonly prescribed inhalation drug for nebulizer      therapy. Medicare allowances for

albuterol sulfate exceeded $182 million during the    14-month period of our review,

representing 68 percent of total allowances for all   nebulizer drugs.


Medicare determines drug allowances based on the lower of estimated acquisition

costs (EAC) or national average wholesale prices (AWP) according to 42 Code of

Federal Regulations 405.517. Resulting allowed amounts are the prices that Medicare

and its beneficiaries pay drug suppliers or pharmacies. If a drug has multiple sources,

like albuterol sulfate, the price is based on the lower of the EAC or the median of

national AWPS for all generic sources. Medicare calculates the median AWP using

Z7ieRed Book or similar sources which list the average wholesale prices

pharmaceutical companies self-report for their products. An EAC is determined

based on surveys of the actual invoice prices suppliers pay for drugs.


Pharmacies or DME suppliers use a drug-specific procedure code, J7620, to claim

Medicare reimbursement for albuterol sulfate. This code identifies the product, but

not the drug manufacturer. Therefore, it does not indicate whether the dispensed

drug is a brand-name drug or generic equivalent.


The HCFA designated four Durable Medical Equipment Regional Carriers

(DMERCS) to process all claims for DME, prosthetics, orthotics, and medical supplies,

including nebulizer drugs. Effective October 1, 1993, the DMERCS replaced local

carriers which had previously processed these claims. Each DMERC determines

allowances for albuterol sulfate in its respective region based on the guidelines stated

in the regulations. During the scope of our review, DMERC allowances for albuterol

sulfate were based on median AWP calculations and ranged from $0.40 to $0.43 per

milliliter (ml). Medicare will also pay drug suppliers a monthly dispensing fee of $5

for each drug in addition to the payment for the drug itself.


This study was conducted as part of Operation Restore Trust, an initiative combining

the forces of multiple agencies to combat Medicare and Medicaid fraud, waste, and

abuse in five States. The five States--California, Florida, Illinois, New York, and

Texas--account for 40 percent of the nation’s Medicare and Medicaid beneficiaries.




   10ffice of Inspector General, Medicare Part B - Reimbursement to Providers for
Drugs Used in Conjunction with Durable Medical Equipment, A-06-92-00079
(Washington, D.C.: U.S. Department of Health and Human Services, 1995), 3.


                                            2
The initiative centers on services provided by DME suppliers in addition to services
provided by nursing homes, hospices, and home health agencies.

RelatedWorkbythe     OjJiceofInspector   General

This report is one ofaseries of Office of Inspector General (OIG) inspections
concerning Medicare payments for outpatient prescription drugs in general and
inhalation drugs in particular. Earlier this year, we released a report entitled Medicare
Payments for Nebulizer Drugs (OEI-03-94-O0390). We found that Medicaid reimbursed
albuterol sulfate and other nebulizer drugs at significantly lower prices than Medicare.
In a related report called A Comparison of Albuterol Su~ate Prices (OEI-03-94-00392),
we found that many pharmacies, pharmaceutical buying groups and mail-order
pharmacies charged customers less for generic albuterol sulfate than Medicare’s
allowed reimbursement. A forthcoming report, Questionable Medicare Payments for
Nebulizer Drugs (OEI-03-94-00391), examines coverage, utilization, and medical
necessity issues relating to the use of albuterol sulfate in nebulizers by Medicare
beneficiaries.

In an earlier report, Medicare Part B--Reimbursement to Providers for Drugs used in
Conjunction with Durable Medical Equipment (CIN-A-06-92-OO079), we found that
HCFA lacked clear legislative authority to cover self-administered outpatient
prescription drugs. Additionally, we concluded there was no assurance that drugs were
properly priced and paid because HCFA did not require carriers to obtain detailed
pricing information. We recommended that HCFA seek legislation to expressly
authorize the coverage of drugs used with DME and implement policies and
procedures to ensure that carriers properly price and pay prescription drugs.

METHODO~GY

We obtained pertinent background information on inhalation drugs used in nebulizers
from a wide variety of sources, including HCFA officials, DMERC medical directors
and utilization review personnel, medical equipment suppliers, and pharmacies.

Focusing on albuterol sulfate, the inhalation drug most frequently reimbursed under
Medicare, we selected a stratified random sample of 485 claims for albuterol sulfate
(procedure code J7620) from a HCFA One Percent DME Claims File. Seven strata
were designated in the sampling plan: one for each of the five Operation Restore
Trust States, Puerto Rico, and a strata comprised of J7620 claims from all other
States. Service dates were confined to the 14-month period of our review, January 1,
1994 through February 28, 1995.

We mailed requests for information to the suppliers that billed Medicare for the 485
sampled albuterol sulfate claims. (In this report, we use the term “supplier” to
indicate the entity which billed Medicare for providing the nebulizer drug to the
beneficiary.) These requests covered a variety of subjects, including (1) supplier
business characteristics, (2) how the supplier obtained and delivered the nebulizer


                                             3
drug to the beneficiary, (3) description of the drug provided, and (4) drug
procurement costs and related drug costs. We asked suppliers to submit copies of
documents from their files, such as physician prescriptions, invoices showing drug
procurement costs, and beneficiary medical information, to support each sampled
J7620 claim.

Supplier Response Rates

Suppliers returned completed requests for 418 of the 485 sampled J7620 claims (86
percent response rate). Some respondents did not, however, submit copies of all of
the claim-supporting documentation that we requested. We contacted these suppliers
by telephone and letter to secure missing documentation. After executing this follow-
up plan, we achieved a 47 percent overall response rate for claim-supporting albuterol
sulfate invoices. However, invoice response rates varied widely by strata. These strata
response rates are presented in Appendix A.

Nonreqxmdent and Invoice Cost Analjsex

As mentioned above, a 47 percent response rate for claim-supporting invoices was
achieved. To address the potential bias effects that suppliers who did not provide
albuterol sulfate invoices may have had on our cost estimates, we conducted a chi-
square analysis of nonrespondents (a statistical method used to test a hypothesis
between observed and expected results). Chi-square analysis indicates that there is a
significant difference between suppliers who provided invoices and those who did not
provide invoices with respect to asset size. Suppliers in our sample possessing assets
in excess of $100 million were less likely to submit invoices to support their albuterol
sulfate claims. The table in Appendix A shows that only 5 percent of claims billed by
suppliers owning assets over $100 million were supported with invoices. In contrast,
invoices were submitted for 61 percent of claims billed by suppliers owning assets
under $100 million.

Cost estimates were computed based on a sample of claim-supporting invoices for
albuterol sulfate submitted by supplier respondents. (Cost estimates and associated
confidence intervals appear in Appendix B.) However, our calculations may
overestimate average supplier invoice costs. As explained above, there is a
relationship in our sample between suppliers’ submission of invoices and the size of
their assets. We believe large suppliers owning assets over $100 million may be able
to use their market power to negotiate low costs for albuterol sulfate with drug
manufacturers, wholesale outfits, and pharmacies.

The overall estimate of average supplier cost for albuterol sulfate was applied to a
conservative calculation of total albuterol sulfate units reimbursed by Medicare from
January 1994 through February 1995. These calculations, presented in Appendix C,
illustrate the magnitude of potential program savings if Medicare allowances for
albuterol sulfate were based on supplier invoice costs.



                                            4

This inspection was conducted in accordance with the Quali~ Standards for Inspechons
issued by the President’s Council on Integrity and Efficiency.




                                          J
                                    FINDINGS


MEDICARE’S ALLOWANCES FOR ALBUTEROL SULFATE SUBSTANTIALLY
EXCEED SUPPLIERS ACQUISITION COSTS FOR THE DRUG.

�      Supplikm are paying an average cost of $0.19 per ml for albuterd sulfate.

During the period of our review, January 1994 through February 1995, Medicare
allowed amounts for albuterol sulfate ranged from $0.40 per ml to $0.43 per ml.
Clearly, nebulizer drug suppliers’ acquisition costs for the drug, averaging $0.19 per ml,
are significantly lower than Medicare’s AWP-based reimbursements. Medicare
allowances for albuterol sulfate, based on a median of national AWPS, totaled over
$182 million for this period. If HCFA had based its reimbursement for albuterol
sulfate on the average of supplier invoice costs, as collected in our survey, the
Medicare program could have saved $94 million during the 14-month period of our
review. (See Appendix C) Determination of prescription drug allowances based on
EAC--requiring surveys of supplier invoices--is one of the methods presently
authorized by Medicare reimbursement regulations.

We estimated an overall average supplier cost for albuterol sulfate of $0.19.
Respondents submitted three distinct types of claim-supporting invoices for albuterol
sulfate: manufacturer invoices, wholesale company invoices, and pharmacy invoices.
These invoices reflect three different purchase sources. Therefore, supplier costs for
albuterol sulfate varied widely, ranging from a low of $0.12 to a high of $0.41. To
address this variability, we calculated average supplier cost estimates by invoice type.
The chart below compares cost estimates per ml for each purchase type to Medicare’s
lowest reimbursement per ml of albuterol sulfate during the sample period.



                             Supplier Costs Compared to
                                 Medicare Lowest Allowance
                   Pri@ml      �   PurchaaeSource          !g#jMefMcare

                     $0.50
                    $0.40
                     $0.30
                     $0.20
                     $0.10
                     $0.00
                              Manufacturer    Wholesaler         Pharmacy




                                                    6

�	    ??%enpudased      from a drug manufacture~ the average supplier cost per ml of
      albuterol dfate   was $0.14.

Thirty-two percent of sampled claims were billed by suppliers who purchased generic
albuterol sulfate from a drug manufacturer. In our sample, suppliers’ costs paid to the
drug manufacturer ranged from $0.12 to $0.17. Medicare’s lowest allowance per ml
for albuterol sulfate during the sample time frame was $0.40. This allowed amount is
almost three times the drug manufacturer invoice price average of $0.14.


�	    l%e average cost per ml of albuterol sz@ate was $0.20 when suppllenspurchased
      the drug ji-om wholesale companies.

Twenty-three percent of sampled claims were billed by suppliers purchasing the
nebulizer drug from wholesalers.   While suppliers purchasing from drug
manufacturers were able to obtain albuterol sulfate at the most advantageous costs,
those paying wholesale costs were reimbursed by the Medicare program at rates at
least two times greater than the wholesaler costs estimate.


�	    Supplkm purchasing albuterol sulfate @m phannucies paid an average cost per ml
      of $0.23.

Forty-five percent of sampled claims were billed by suppliers who purchased albuterol
sulfate from pharmacies. These suppliers received Medicare reimbursements at least
1.8 times greater than the $0.23 pharmacy cost estimate.

Invoices of this type indicate the cost suppliers pay to a pharmacy, not the cost that
the pharmacy incurs for the drug. Nebulizer drug suppliers buying albuterol sulfate
from pharmacies may be paying for not only the drug, but also the cost of related
services provided by pharmacies. These services may include dispensing, packaging
and/or shipping the drug to Medicare beneficiaries. Therefore, costs paid by suppliers
purchasing the drug from pharmacies were less competitive than those paid to
manufacturers and wholesalers.

only 43 percent of sample claims were billed by suppliers who provided information
on their additional costs. Most suppliers did not quantify these other costs per ml of
albuterol sulfate. Rather, these suppliers listed general types of additional expenses
including sales, billing and support personnel, respiratory therapists, drivers, 24-hour
service, home delivery, insurance, and storage. Suppliers also noted expenses such as
packaging, Iabelling, shipping, and delivexy of the drug.
�	    Most albuterol @ate   bilkd to the Medicare program was the generic form of the
      drug.

Suppliers submit claims for albuterol sulfate to Medicare under the HCFA Common
Procedure Coding System code, J7620. Suppliers bill code J7620 whether the
albuterol sulfate they provided to beneficiaries was brand name or generic in form.
Our analysis indicates that 90 percent of sampled claims were supported by supplier
invoices for generic, non-compounded albuterol sulfate. In contrast, only six percent
of sampled claims were supported by supplier invoices for brand name albuterol
sulfate.

The remaining four percent of sampled claims were supported by invoices for the
ingredients suppliers use to compound albuterol sulfate. Suppliers compound
albuterol sulfate on an individual basis from prescribed ingredients. We could not
determine unit cost per ml of albuterol sulfate from the compounding ingredient
invoices. Therefore, these invoices were not included in the cost analysis.




                                           8�
                    RECOMMENDATIONS


The findings of this report indicate that Medicare’s allowances for albuterol sulfate are
excessive compared to suppliers’ costs for the drug. During the period of our review,
Medicare reimbursed suppliers at allowed amounts ranging from $0.40 to $0.43 per ml
of albuterol sulfate. These allowances were based on drug manufacturer AWPS.
Current HCFA regulations allow Medicare reimbursement to be based on the lower of
EAC or median AWP. However, HCFA has been unsuccessful in gathering the data
to determine EAC.

If the HCFA had based its reimbursement for albuterol sulfate on the average of
supplier invoice costs, as illustrated in this report, the Medicare program could have
saved $94 million during the 14-month period of our review. Although we recognize
that suppliers of albuterol sulfate incur other costs related to inhalation therapy in
addition to the cost of the drug, we believe current Medicare reimbursements more
than compensate suppliers for these costs along with a reasonable profit margin.

We believe our invoice cost analysis further supports a recommendation made in an
OIG report entitled Medicare Payments for Nebulizer Drugs. We previously
recommended that HCFA reexamine its Medicare drug reimbursement methodologies
with the goal of reducing payments as appropriate.

For our readers’ convenience, we repeat here the options contained in our prior
report for changing Medicare’s payments for prescription drugs.

Discounted Wholesale Price

Many Medicaid State agencies use a discounted AWP to establish drug prices.
Medicare should have a similar option. Medicare could base its drug payment on the
lower of a discounted AWP or the median of the AWP for all generic sources,
whichever results in the lower cost to Medicare and its beneficiaries. To implement
this recommendation, HCFA would have to revise Medicare’s claims coding system
which does not identify the manufacturer or indicate if the drug is a brand name or a
generic equivalent, information that is needed to discount the AWP and obtain a
rebate for a specific drug. Medicaid uses the National Drug Code (NDC) in
processing drug claims. The NDC identifies the manufacturer and reflects whether the
drug is a brand name or a generic equivalent.

Manufacturers’   Rebates

Medicare could develop a legislative proposal to establish a mandated manufacturers’
rebate program similar to Medicaid’s rebate program. We recognize that HCFA does
not have the authority to simply establish a mandated manufacturers’ rebate program
similar to the program used in Medicaid. Legislation was required to establish the
Medicaid rebate program, and would also be required to establish a Medicare rebate


                                            9
program. Wehavenot        thoroughly assessed howa Medicare rebate program might
operate, what administrative complexities it might pose, or how a Medicare rebate
program might differ from a Medicaid rebate program. We believe, however, the
legislative effort would be worthwhile. The same manufacturers that provide rebates
to Medicaid make the drugs that are used by Medicare beneficiaries and paid for by
the Medicare program.

Competitive Bidding

Medicare could develop a legislative proposal to allow it to take advantage of its
market position. While competitive bidding is not appropriate for every aspect of the
Medicare program or in every geographic location, we believe that it can be effective
in many instances, including the procurement of drugs. Medicare could ask
pharmacies to compete for business to provide Medicare beneficiaries with
prescription drugs. All types of pharmacies could compete for Medicare business,
including independents, chains, and mail-order pharmacies.

Inherent Reasonableness

Since Medicare’s guidelines for calculating reasonable charges for drugs result in
excessive allowances, the Secretary can use her “inherent reasonableness” authority to
set special reasonable charge limits. If this option is selected, however, it will not be
effective unless the Secretary’s authority to reduce inherently unreasonable payment
levels is streamlined. The current inherent reasonableness process is resource
intensive and time consuming, often taking two to four years to implement. Medicare
faces substantial losses in potential savings--certainly in the millions of dollars--if
reduced drug prices cannot be placed into effect quickly.

Acquisition Cost

Medicare could base the payment of drugs on the EAC. The DMERCS currently
have this option; however, HCFA has been unsuccessful in gathering the necessary
data to fully implement it. Once the problem of gathering the necessary data is
overcome, the use of the EAC would result in lower allowed amounts. A variation of
this option is to use actual rather than estimated acquisition costs.

HCFA COMMENTS

The HCFA concurred with our recommendation to reexamine Medicare’s drug
reimbursement methodologies with a goal of reducing payments. In exploring new
strategies for changing Medicare’s payment for prescription drugs, HCFA has
constructed a framework to calculate drug prices centrally. They have also developed
a crosswalk between Medicare’s current coding system and the NDCS to enable claims
processing using the NDC. In addition, HCFA is examining the use of competitive
bidding for nebulizers and associated drugs under its demonstration authority.



                                            10

The HCFA agreed with our concerns about invoking the inherent reasonableness
authority and stated that it appreciated the OIG’S work in this area. The HCFA is
currently addressing this issue through the regulatory process. The full text of HCFA’S
comments are presented in Appendix D.

In a technical comment, HCFA suggested that we review the proportion of albuterol
sulfate actually obtained through a pharmacy as opposed to a pharmacy selling to a
DME company who, in turn, sells to the Medicare patient.

OIG RESPONSE

We support HCFAS efforts to revise its drug reimbursement mechanisms to more
appropriately pay for prescription drugs covered under the Medicare program. We
believe revisions to the current payment methodologies that take into account the
actual costs of these drugs would provide significant savings to the Medicare program.

We discussed directly with HCFA staff the data we had available in response to their
technical comment.




                                          11

                                  APPENDIX                            A


                                NONRESPONDENT                   ANALYSIS

An important consideration with respondent-based research is the bias that maybe
introduced into the results if nonrespondents differ from respondents in systematic
ways. We achieved an overall response rate for claim-supporting albuterol sulfate
invoices of only 47 percent. However, as shown in the table below, invoice response
rates varied widely by strata.


                        INVOICE RESPONSE RATES BY STRATA
                                                                                                     !1

         strata               Population       Sample        Achieved Sample            Invoice
                                 size           size          Size (Invoices)       Response Rates

         California              603             75                 25                   33%
                                                                                \                    1
         Florida                 1789            75                 40                   53qo I
         Illinois
         New York
                          I
                                 464
                                 433
                                           I
                                                 75
                                                 75
                                                        I
                                                                    28
                                                                    31
                                                                                I
                                                                                         3770
                                                                                         4170
                                                                                                     I
                                                                                                     !
         Puerto Rico             866             55                 46                   84?Z0
         Texas                   1075            75                 36                   48%
         Other States            6763            55                 24                   44?Z0
         TOTAL                  11993           485                230                   4770
                                                                                                     1



In order to test for potential bias effects that suppliers who did not provide albuterol
sulfate invoices may have had on our invoice price estimates, we conducted an analysis
utilizing National Supplier Clearinghouse (NSC) supplier profile data. The NSC
processes all supplier number applications and maintains files on these suppliers.

We inspected NSC data profiling the nebulizer drug suppliers who billed Medicare for
the 485 albuterol sulfate claims in our sample. We reviewed NSC data fields
providing information on supplier characteristics such as size and scope of business
activity. We focused our analysis on suppliers possessing assets over $100 million.
The Chi-square statistic was used to test for differences between suppliers who
submitted invoices and suppliers who did not submit invoices with respect to assets.




                                                      A-1

                       CHI-SQUARE        FOR SIZE OF ASSETS


                          Invoice            Invoice Not      Total         I
                                                                          9Z0nvoice
                         Submitted            Submitted                   Submitted
 Assets >$100             5 (2%)              95 (41%)         100           5%
 million
 Assets <$100            214 (98%)            138 (59%)        352           61%
 million
 Overall                    219                  233           452           48%

CHI-SQUARE = 97.06@                  Degrees of Freedom = 1




Chi-square results are presented in the table above. Analysis indicates that our
invoice price estimates are biased with respect to size of supplier assets. We can
conclude that there is a relationship in our sample between invoice submission and
size of assets at the 99% confidence level.




    2A Chi-square statistic of 6.63 or higher indicates that we can reject the null
hypothesis that the invoice submissions and asset sizes are independent at the 99
percent confidence level.


                                           A-2
                             APPENDIX                      B


COST ESTIMATES AND CONFIDENCE                    INTERVALS

The tables below contain estimated average supplier costs for albuterol sulfate overall
and by purchase source. Also provided are estimated proportions of invoices by
purchase source and drug type. These estimates andtheir corresponding 95 percent
confidence intervals were computed using standard statistical formulas for a
single-stage stratified random sample.

Supplier Cosb for Ailmterol Sulfate
 Overall Mean Estimate                            95% Confidence Interval
 $0.194                                           $0.185-$0.204

Supplier Cosfi by Invoice l)pe
 Purchase Source                  Mean                             95% Confidence Interwd

 Manufacturer                     $0.139                           $0.133-$0.145

 Wholesaler                       $0.203                           $0.177-$0.229


 Pharmacy                         $0.227                           $0.207-$0.246


Suppller Rdzase    Source
 Purchase Source                  Proportion                       95% Confidence Interval
 Manufacturer                     32.25%                           21.39% - 43.11%
{1
 Wholesaler                      ] 23.25%                         I 13.63% - 32.88%           II
 Pharmacy                         44.50%                           32.66% - 56.34%

T@e of Albuterol Sulfate l’+ovided
 Drug Tjrpe                       Proportion                       95% Confidence Interval

 Generic                          90.02%                           82.57% - 97.47%

 Brand Name                       5.9370                           0- 12.10%

 Compounded                       4.05%                            O - 8.62%


Other Costi
                                  Proportion                      95% Confidence Interval
 Reported Other Costs             42.80%                          32.54% - 53.06%



                                               B-1

                                  APPENDIX                       C


CALCULATION             OF POTENTIAL           MEDICARE        SAVINGS

Analysis of claim-supporting invoices indicates that suppliers are paying an average
cost of $0.19 per ml for albuterol sulfate.

During the period of our review, January 1994 through February 1995, Medicare
allowed amounts for albuterol sulfate ranged from $0.40 per ml to $0.43 per ml.
Medicare allowances for albuterol sulfate, based on a median of national AWPS,
totaled over $182 million for this period. If Medicare allowances for albuterol sulfate
had been based on supplier invoice costs, however, the program could have saved an
estimated $94 million.

This savings estimate was calculated by first determining the total Medicare allowance
for albuterol sulfate during the study period. This figure was obtained from HCFA’S
National Claims History One Percent File. Total allowed services corresponding to
the total Medicare allowance were calculated conservatively by dividing the total
allowance by the lowest reimbursement allowed during this period: $0.40. Total
allowed services were then multiplied by the overall average supplier cost of $0.194
per ml of albuterol sulfate. This estimated total Medicare allowance for albuterol
sulfate was subtracted from the actual total Medicare allowance to derive potential
savings. The calculation steps are outlined below.

STEPl

[[     Actual Total Allowance      I LowestReimbursementper ml I           Estimated Total Servkes   II
II          $182,313,000           I                 I $0.40        I           = 455,782,500        II


STEP 2

      Estimated Total         Estimated Mean Supplier Price         Estimated Total Allowance
          Services                       per ml
        455,782,500                       x $0.194                           = $88,421,805

                                       ($0.185 - $0.204)            ($84,319,763- $92,979,630)


STEP 3
     Actual Total Allowance        Estimated Total Allowance            Potential Medieare Savings
          $182,313,000                      -$88,421,805                      = $93,891,195

                                   ($84,319,763- $92,979,630)           ($89,333,370- $97,993,237)




                                                     c-1

APPENDIX     D




AGENCY COMMENTS




      D-1
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                        ~EPARTMENT OF HEALTH & HUMAN SERVICES
                                                                                            Health   Care financing      Administration




  ~+                                                                                        The Administrator
   ‘+.,,.,.
      >                                                                                                                20201
                                                                                            Washington,    D.C.




                      DATE:             klAY-31996

                      TO:             June Gibbs Brown
                                      Administrator

                                      Bruce C. Vladec a       @
                      FROM:                                                                                       _T


                                      Administrator       M                                                       o-

                      SUBJECT:       Office of Inspector General (OIG) Working Draft Reports: Appropriateness
                                     of Medicare Prescription Drug Allowance’’(OEI-03 -94-OO42O),“Supplier
                                     Acquisition Costs for Albuterol Sulfate” (OEI-03-94-00393), “A
                                     Comparison of Albuterol Sulfate Prices’’(OEI-03 -94-OO392)

                      We reviewed the subject reports concefig    Medicare payments for outpatient
                      prescription drugs. Our detailed comments on the findings and recommendations are
                      attached for your consideration. Thank you for the oppotity   to review and comment on
                      the reports.

                      Attachment




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                                 EXSEC

                                 DATE SEXT

                                           3

             Health Care Financing Administration (HCFA) Comments on

               OffIce of Inspector General (OIG) Working Draft Reports:

            “Medictie Prescription Drug Allowances,’’(OEI-03 -94-OO42O),

                   “Supplier Acquisition Costs for Albuterol Sulfate.”

          (OEI-03-94-00393), and “A Comparison of AIbuterol Sulfate Prices,”

                                   (OEI-03-94-00392)




OIG Recommendation

HCFA should reexamine its Medicare drug reimbursement methodologies, with a goal of
reducing payments as appropriate.

HCFA Response

We concur. HCFA is exarninin g ways to reduce payments for prescription drugs as
follows:

Discounted Wholesale Price

Lnexploring new strategies for changing Medicare’s payment for prescription drugs, we
have constructed a framework to calculate drug prices centrally. Also, we are developing
a crosswalk between the current HCFA Common Procedure Coding Systems and the
National Drug Code (NDC) to process chims using the NDC.

Manufacturer’s Rebates

While the Administration included a rebate mechanism in its proposed Medicare drug
benefit in the Health Care Reform legislation, it is not an option that HCFA is cwrently
considering.

Competitive Bidding

HCFA is exploring the use of competitive bidding for nebulizers and associate drugs
under its demonstration authority.

Lnherent Reasonableness

We agree and appreciate OIG’S work in this area. HCFA is addressing this issue through
the regulatory process. This process has a comment period; therefore, it requires time to
implement.
Page 2

Acquisition Cost

This option involves lowering drug payments by basing them on the estimated acquisition
cost. A 1994 survey attempt was made by HCFA to collect the necessary data to fully
implement current regulations. The survey was not approved by the Office of
Management and Budget because it was found to be too burdensome to pursue due to the
large number of physicians and drugs involved.

Technical Comment

We suggest OIG review the proportion of albuterol actually obtained through a pharmacy,
as opposed to a pharmacy selling to a durable medical equipment provider who in turn
sells to the Medicare patient.

				
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